Free Cash Flow

One of the main graphs shown in the financial projections template is the free cash flow graph.

Free cash flow (FCF) is the cash flow available after the business has paid for all of its operating needs including providing working capital, and invested in property, plant, and equipment (capital expenditure) necessary to maintain its current growth rate.

The purpose of calculating free cash flow is to show what cash is available (free) to the providers of finance of the business. This free cash flow can then be utilized to reduce the debt or pay dividends to equity providers. In addition, free cash flow might also be available to improve the growth rate of the business by taking advantage of expansion opportunities and investing in new products.

Free Cash Flow Formula

The free cash flow formula is as follows:

Free cash flow = Cash flow from operating activities - Capital expenditure

The information required to calculate free cash flow is taken from the financial projections cash flow statement.

How to Calculate Free Cash Flow

If we look at the basic cash flow statement below, the highlighted elements represent the main components of free cash flow of the business.

Cash Flow Statement and Free Cash Flow
Net income 5,908
Add back depreciation 14,000
Working capital -4,978
Operating activities 14,930
Capital expenditure -10,000
Investing activities -10,000
Debt repayments -16,500
New debt 16,000
New capital 5,000
Financing activities 4,500
Net cash flow 9,430
Opening cash balance 966
Closing cash balance 10,396

In the above cash flow statement, the cash flow from operating activities is 14,930 and the investment in property. plant, and equipment (capital expenditure) is 10,000. Assuming all the capital expenditure was necessary to maintain the current growth rate of the business, then the free cash flow (FCF) is calculated as follows:

FCF = Cash flow from operating activities - Capital expenditure
FCF = 14,930 - 10,000
FCF = 4,930

In this example, after the business has paid for all of the operating requirement including any necessary working capital, and invested in property, plant and equipment to maintain its current rate of growth, the free cash flow available to the providers of finance of the business is 4,930.

Free Cash Flow and Financial Projections

It is important to understand and monitor free cash flow as providers of both debt and equity finance will look at the amount available for indications that the business has sufficient cash to take advantage of expansion opportunities, develop new products, reduce debt, and pay dividends.

Free cash flow is one sign of a healthy business, and our financial projections template will help you to keep a check on its projected level, by calculating the amount of free cash flow and presenting this in the form of a line graph for each of the five years .

You May Also Like